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Individual Behaviors and Collective Welfare: Ramsey’S ” Microfoundations ” of ” Macro-Equilibrium ” Marion Gaspard

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Individual Behaviors and Collective Welfare: Ramsey’S ” Microfoundations ” of ” Macro-Equilibrium ” Marion Gaspard Individual Behaviors and Collective Welfare: Ramsey’s ” microfoundations ” of ” macro-equilibrium ” Marion Gaspard To cite this version: Marion Gaspard. Individual Behaviors and Collective Welfare: Ramsey’s ” microfoundations ” of ” macro-equilibrium ”. Conference on the History of Macroeconomics, R. Backhouse, P. Bridel, M. De Vroey, Jan 2005, Louvain la Neuve, Belgium. halshs-01162036 HAL Id: halshs-01162036 https://halshs.archives-ouvertes.fr/halshs-01162036 Submitted on 9 Jun 2015 HAL is a multi-disciplinary open access L’archive ouverte pluridisciplinaire HAL, est archive for the deposit and dissemination of sci- destinée au dépôt et à la diffusion de documents entific research documents, whether they are pub- scientifiques de niveau recherche, publiés ou non, lished or not. The documents may come from émanant des établissements d’enseignement et de teaching and research institutions in France or recherche français ou étrangers, des laboratoires abroad, or from public or private research centers. publics ou privés. Individual Behaviors and Collective Welfare: Ramsey’s “microfoundations” of “macro-equilibrium” Marion Gaspard♣ UMR Triangle, Pôle Auguste et Léon Walras, Université Lumière yon 2 I. Introduction Since the end of 1970’s -and the success of the New Classical School –, the face of macroeconomics has changed profoundly. On the one hand, the research has turned gradually away from the analysis of the short-term fluctuations to favor a study of the long term determining factors of macroeconomic variables. One has studied the determinants of growth and has interpreted the cycles as fluctuations around these long-term values. On the other hand and in the same movement, one saw setting itself a general equilibrium macroeconomics. One of the weapons of these alterations is what is called in a generic way the “à la Ramsey models”. In its simplest shape, this type of model considers an economic agent with infinite life expectancy, who decides on the intertemporal allocation of its income and work. Under certain very restrictive conditions, this economic agent can be interpreted as a “representative agent”, whose choices represent those of an economy of general equilibrium.1 The “à la Ramsey” models are thus used to describe macroeconomic phenomena, such as growth or fluctuations, as the result of individual procedures of intertemporal optimization. Although this use rests on controversial hypotheses - rational expectations, market clearing, and the figure of the representative agent itself - it is often considered as a possible way to provide macroeconomics with consistent microeconomic foundations. The current success of the “à la Ramsey” models confers in return on Frank Ramsey (1903- 1930) a role in the history of economic thought: that of an illustrious precursor, who would have, as early as 1928, established the tools privileged by the contemporary macroeconomists. Such is for example Robert Barro and Xavier Sala-I-Martin’s vision (1995). But the tributes often do not stop there, and temptation is strong to make Ramsey the precursor of the current theoretical representations, by qualifying him as precursor of "the modern theory of the growth" (Barro and Sala-I Martin 1995, 10): one in this case describes Ramsey’s economic agent with infinite life expectancy as the first representative agent in macroeconomics, and one describes Ramsey’s contribution as “the prototype for studying the intertemporal allocation of resources” (Blanchard and Fisher 1989, 21) or "the battery of small [contemporary] models” (Blanchard 2000, 1381) as many applications of Ramsey’s work. ♣ Correspondance may be sent to [email protected] 1 Two theoretical justifications support this interpretation. The first one resorts to the welfare theorems, the intertemporal Pareto-optimal choice of the representative agent being associated with a decentralized allocation of resources. See for instance Blanchard and Fisher (1990, 21 and 50-51). The second justification is bound to the results of the literature on the aggregation conditions. The representative agent represents fictitiously a general equilibrium economy, in which individuals are identical, or, in a less caricature way, in which individuals are endowed with identical and homothetic preferences, but with different initial endowments. In this “hicksian economy” (Arrow and Hahn 1971, 220), the choices of the representative agent are the same as the ones of a general equilibrium economy. See for instance Jacques and Rebeyrol (2001). Such paternity recognitions arouse naturally curiosity. Ramsey indeed wrote in Cambridge in the 1920’s, where Marshallian thought was still dominating and impervious to the theory of general equilibrium. Especially, macroeconomics was not yet an autonomous research field, and it was not naturally even time to wonder about its microeconomic foundations. Therefore, the young Cambridge mathematician could not have envisaged the present stakes of the “à la Ramsey” models and the current interpretations of Ramsey’s work should probably suffer from a retrospective slant. Incursion into the original text allows testing these two kinds of assertion: that of the macroeconomist, looking for pre-Keynesian years heroes, and that of the historian, looking for the initial theoretical framework, in order to rediscover the issue at stake in 1928. The experience is then relatively surprising, and leads to two kinds of results. 1. The first one concerns the stakes in Ramsey’s initial contribution. More than the single determination of a mathematical optimal saving’s rule, the matter was to understand the consequences of individual savings behaviors on collective welfare. The challenge was therefore, and more profoundly, to state a theoretical representation allowing connecting a micro- and a macro level. 2. The second result concerns Ramsey’s theoretical solution. In contrast with some retrospective interpretations, he exactly avoided any representative agent logic, in the double sense we give today to this concept in macroeconomics: a way to pass over the individual idiosyncrasy in constructing a fictional economic agent whose choices represent those of an underlying decentralized economy or a way to use an agent that reflects the aggregation of individual behaviors. Ramsey’s challenge was rather to state results concerning macroeconomic equilibrium by bypassing the partial equilibrium framework he inherited from Cambridge. Such statements rest logically on two kinds of inquiry I successively lead in the following pages. The next section first concentrates on the origin of Ramsey’s inaugural question: “how much of its income should a nation save” (Ramsey 1928, 543). It shows that Ramsey's theory has to be read in light of a striking question in the 1920’s: is a laissez-faire system able to warrant a maximum of collective economic welfare? As regards the question of saving, the problem arises from a noticeable fact: individuals tend naturally to prefer present satisfactions. The resulting global saving appears insufficient if we consider the prosperity of the nation, conceived as a transgenerational entity. Therefore, the 1928 essay deals first of all with a problem of divergence between the pursuit of the individual interest and the realization of the collective interest. Taking such a redefinition of the « Ramsey Problem » into account imposes then that our glance settles on the whole 1928 contribution, as I propose in sections III and IV. One usually retains in Ramsey’s paper only the first part, dedicated to the mathematical demonstration of the famous rule of optimal saving. However, this demonstration takes place into a very specific framework - that of a cooperative-nation refusing to privilege the present moments - and we guess that Ramsey’s attempt to enlarge his approach in the remainder of the 1928 article was at least of equal importance in Ramsey’s eyes. In a least known part of his work, he indeed handles the individual behavior of saving, introduces a discount rate in the problem of optimization, and discusses some consequences of his analysis on the determinants of the interest rate. A thorough perusal of Ramsey’s global argumentative logic reveals that he is in fact building, step by step, a careful study of the consequences of the discount rate on the national welfare and that progressing in the same movement towards a theoretical representation of a decentralized economy. His solution rests then on an original concept, which allows him to bind the individual and the collective levels, the concept of dynasty. II. Ramsey’s Problem: origin and stakes Two hypotheses could explain the origin of the 1928 essay. The first assumption relies on the intellectual path of Ramsey himself: the difficulties he met in the writing of his article on optimal 2 taxation, “A Contribution to the Theory of Taxation” (1927) could be the roots of the 1928 reflections. In that paper, published in the March issue of the Economic Journal, Ramsey tried to define the best way to distribute a global amount of tax, so that “the decrement of [global] utility could be a minimum” (Ramsey 1927, 47). We shall not remind here of his demonstrations but simply note that in the developments of the fourth part of the 1927 article, dedicated to some applications of his mathematical result, Ramsey mentions the possibility of a dynamic analysis, by wondering notably about the opportunity of a differentiated taxation on savings. He does not succeed in handling this problem, and indicates that
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